Goldman pushes hedge funds for your 401(k)

John Paulson is one of a number of high profile hedge funders who have been a disappointment lately.

FORTUNE — Usually Wall Street waits for a bubble before it pushes an investment on average Joes.

So it’s certainly a change that the returns on the investment Wall Street is currently trying to sell to individual investors have stunk lately. Is that any better? Probably not.

Goldman Sachs (GS) recently announced it was launching its first mutual fund that invests directly in hedge funds. The private investment vehicles have typically been reserved for the ultra-rich. This Goldman fund, which will be called the Goldman Sachs Multi-Manager Alternatives Fund, will be open to anyone who can plunk down $1,000.

And Goldman is pushing the fund not just for risk-averse investors looking for a flyer for some extra cash, but as one that makes a sensible choice for your 401(k). According to a very reasonably worded press release, Goldman says the lack of access to hedge funds has left many investors with little exposure to alternative investments in their “retirement accounts.” Says Goldman’s Jason Gottlieb, who will be a co-portfolio manager of the fund, in the release, “Today’s complex markets require sophisticated investment techniques that can enhance a traditional portfolio, and bring investors closer to their long term goals.”

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And if working longer is your goal, then hedge funds would be the investment for you, at least recently. Over the past five years, the average hedge fund, as measured by the HFRX Global Hedge Fund Index, has lost 9%. The S&P 500 (SPX) in the same time frame gained 21%. This year is more of the same. Hedge funds are up just over 5%; the market index, 14%. A recent study from Rob Arnott’s Research Affiliates found that returns go down and risks go up when investors add hedge funds to a standard portfolio.

A mutual fund that invests in hedge funds could do even worse. That’s because, unlike hedge funds, investors in mutual funds, based on the SEC’s rules, need to be able to cash out whenever they wish. That doesn’t work for every hedge fund strategy. “The challenge is that some of the best hedge fund strategies don’t offer much liquidity,” says Bob DiMeo, managing director at DiMeo Schneider, a consultant to institutional investors. “You still get the high fees, but instead you have an arm and a leg tied behind your back trying to get market beating returns.”

The no-load Goldman mutual fund will have an annual fee of 3.3%, which is less than the average hedge fund, which takes 20% of profits on top of an annual 2% fee. But it’s about three times what the average stock mutual mutual fund charges, and about 25 times the 0.13% a year that the average S&P 500 index fund charges.

Despite the poor performance, the amount of money pouring into hedge funds has continued to increase. Assets in the hedge fund industry have more than tripled in the past decade to $2.25 trillion. Much of the money coming into hedge funds recently have been from pension funds. Now Wall Street is betting it will be able to entice average investors as well.

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Along with Goldman, Morgan Stanley (MS) recently launched has its own hedge fund offering in the form of a mutual fund. But unlike Goldman’s fund, Morgan Stanley’s AIP Dynamic Alternative Strategies fund won’t invest directly in hedge funds. Instead, it will invest in other mutual funds that are trying to mimic hedge funds, as well as Morgan’s “proprietary hedge fund replication strategy.” In April, the SEC approved plans by private equity firm Blackstone (BX) to launch its own hedge fund-like mutual fund.

“There’s not a lot of money to be made in telling people not to invest in hedge funds,” says Simon Lack, a former JPMorgan hedge fund executive and author of The Hedge Fund Mirage, which was published last year. “Eventually persistently poor performance will drive people out, but it takes time.”

In the face of the recent poor returns, hedge fund defenders typically say something like, yeah but, lots of things, including real estate and commodities, do worse than stocks over long-periods of time. But you don’t know what will do well when. So a portfolio invested in hedge funds along with stocks and bonds and that other assets will better weather the market’s ups and downs, guaranteeing more of your money will be there when you need it. The problem is unlike those other things hedge funds aren’t really a unique asset. They are just a way to invest in those other things and pay high fees to do it.

You know what’s done a lot better than hedge funds recently? Mutual funds. So maybe what we really need is a hedge fund that invest in mutual funds. But that would be silly, right?

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